Empowerment or Financialization? The Gains from Financial Inclusion

Expanding access to credit markets can be seen as a source of empowerment when it increases economic opportunities and changes who is able to start a new business. It can also have equilibrium effects on wages so that the gains from financial development are widely shared. But others see credit market expansion as an unwelcome process of `financialization' with many of the gains being appropriated by financial institutions, pointing to the concentration in ownership of financial intermediaries, especially banks, around the world. This paper explores these issues, investigating the consequences of financial sector expansion for profits, wages and entrepreneurial activity using a calibrated general equilibrium model with financial frictions, endogenous default, and wealth inequality. A key element of the model is to examine how the surplus created in the real economy by expanding financial markets is shared between borrowers, lenders, and workers employed by firms. We show that competition in banking can be an important determinant of both equity and efficiency, and hence the gains from financial inclusion. The framework also highlights the role that different types of contractual imperfections can play in determining the distribution of gains from expanding market access.